PERFECT COMPETITION VS OLIGOPOLY — SIMILARITIES AND DIFFERENCES

Perfect competition is a market structure in which there are large numbers of buyers and sellers of homogenous goods.

An oligopoly is a market structure dominated by a few firms, who either sell homogenous goods or differentiated goods.

Both perfect competition and oligopoly have similarities and differences, which we will discuss in this post.

Similarities Between Perfect Competition And Oligopoly.

1. There is competition in both markets: Competition exists in both perfect competition and oligopolies as there are multiple firms in both markets.

2. Both maximize profit: Both perfect competition and oligopoly maximize profit where marginal revenue equals marginal cost.

Difference Between Perfect Competition and oligopoly

1. Goods sold in a perfectly competitive market are homogenous whereas goods sold in an oligopoly may be homogenous or slightly differentiated.

2. In perfect competition, there is no barrier to entry, whereas, in an oligopoly, there are high barriers to entry

These high barriers to entry may stem from economies of scale or predatory pricing.

3. A Perfect competitor is a price taker whereas an oligopolist is a price maker

4. Collusion is possible in oligopoly, whereas collusion is not possible in perfect competition.

5. Uniform price exists in perfect competition as firms must sell at the market prevailing price.

On the contrary, price rigidity exists in oligopolies because of the uncertainty associated with price competition.

6. Perfect competitive firms have perfect knowledge about the prevailing market conditions, whereas oligopolists have imperfect knowledge about the prevailing market condition.

7. No selling cost is incurred in perfect competition, whereas selling costs ( such as advertisement expenses) are incurred in oligopolies.

8. Perfect competitive firms act independently whereas oligopolies act interdependently

9. The demand curve of a perfectly competitive firm is perfectly elastic whereas the demand curve of an oligopolist is indeterminate (because of the uncertainty and risks associated with price competition).

10. Perfectly competitive firms are productively efficient because they produce at the output where marginal cost equals the long-run average cost.

In contrast, oligopolies are productively inefficient because they do not produce at the output where marginal cost equals the long-run average cost.

11. The condition "price equal marginal cost"  is true for perfectly competitive firms, which means they are allocatively efficient.

In contrast, oligopolies are allocatively inefficient because they do not produce at the production level where price does not equal marginal cost.

READ ALSO: MONOPOLISTIC COMPETITION VS MONOPOLY

Tabular Comparison of perfect competition and oligopoly 

Market/featuresPerfect competitionOligopoly
Numbers of firmsVery largefew
Demand curvePerfectly elasticindeterminate
Price makerNo, there are price takersyes
Level of knowledgeperfectImperfect
Barriers to entryNonehigh
Productively efficientTruefalse
Nature of goodshomogenoushomogenous or slightly differentiated
Allocatively efficientyesno
Nature of pricinguniform pricerigidity
Possibility of collusionnoyes
Selling costsabsentpresent

To summarize, the major difference between a perfectly competitive firm and an oligopolist is that the former is a price taker while the latter is a price maker.

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